Minor changes to accounting standards on Consolidations, Joint Arrangements, and Fair Values for 2014

The International Accounting Standards Board (IASB) has released three new amended accounting standards that will apply to December 2013 and June 2014 financial statements. These international financial reporting standards (IFRS) which will be shortly rebadged by the Australian Accounting Standards Board (AASB) as Australian accounting standards will by and large have only a minor impact as the current standards generally clarify what the existing requirements are. The exception is the joint arrangements standard which removes the option of using proportionate consolidation for joint ventures and instead now requires the use of the equity method of accounting (which has generally been favoured by Australian companies).

The new IFRS/AASB accounting standards are part of the convergence program which is designed to ensure that US and International accounting standards have essentially the same requirements as a further step down the path of the US adopting full IFRS instead of its existing local FASB accounting standards. Earlier commentary on these new standards was included in the April 2011 edition of our IFRS News publication and the Emerging Issues Accounting Alert – Progress Report on IASB-FASB Convergence Work.

IFRS 10/AASB 10 Consolidations & IFRS 12/AASB 12  Disclosures
IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Involvement with Other Entities are, in part, a result of the global financial crisis where in some overseas jurisdictions it was alleged that some companies avoided including all their operations on their balance sheets. IFRS 10 now uses a more principles based definition of control that will require all ‘in substance’ controlled entities including special purpose entities to be included in the consolidated financial statements. IFRS 10 replaces IAS 27/AASB 127 Consolidated and Separate Financial Statements and SIC 12/AASB Interpretation 112 Consolidation – Special Purpose Entities. From an Australian perspective this amending standard should have minimal impact. However, where there are ‘borderline’ questions on control, IFRS 10 will provide a stricter consolidation requirement.
In particular guidance is now provided on:

• Control as the result of a dominant minority shareholding (de facto control)
• The role of potential voting rights such as options and convertible bonds
• Distinguishing control in an agency relationship

In addition IFRS 12 requires enhanced disclosures of both consolidated and non-consolidated entities where an investor or sponsor has a significant involvement. This, it is argued, enables readers of the financial statements to better understand the risks (and rewards) of such investments.

IFRS 11/AASB 11 Joint Arrangements
IFRS 11 which replaces IAS 27/AASB 127 does make one significant change. This relates to the removal of the option to use proportional consolidation for joint ventures and instead equity accounting (single line consolidation rather than the percentage of assets and liabilities) must now be used. In practice, most Australian companies had used equity accounting so this amendment should have only a minor impact locally. The removal of proportionate consolidation now means that the IASB and US accounting standards are effectively converged, and the legal form of the joint arrangement no longer determines the accounting.

However, the IASB's Frequently Asked Questions notes that whilst the IASB is removing proportionate consolidation as it is defined in the IFRS, it is not preventing a party to a joint arrangement from recognizing individual assets and liabilities and the related revenue and expenses when that party has rights to them.

IFRS 13/AASB 13 Fair Value Measurement
IFRS 13 is part of the IASB and US FASB convergence project to have a single global accounting standard. On fair values, this objective has been achieved apart from some minor differences in wording and style.
However IFRS 13 is unlikely to cause any major change in behaviour as the objective of the amended standard is to bring all the fair value requirements back to one single standard, and as such the guidance should be consistent with existing practice.

The fair value measurement framework is based on a core principle that defines fair value as an exit price, while retaining the exchange price notion contained in the existing definition of fair value in IFRSs. The Standard also clarifies that fair value is based on a transaction taking place in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. The principal market is presumed to be the market in which an entity normally enters into a transaction for the asset or liability.

For liabilities, the Standard provides extensive guidance to deal with the problematic issue of measuring the fair value of a liability in the absence of a quoted price in an active market to transfer an identical liability.
Disclosures in the new Standard will increase transparency about fair value measurements, including the valuation techniques and inputs used to measure fair value.

If you would like to discuss this issue, please contact your usual Grant Thornton advisor or the author of this article.

Keith Reilly
National Head of Professional Standards
T  +61 2 8297 2400
E  keith.reilly@au.gt.com